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Economic Challenge for President Jokowi

On Friday, January 2, 2015, President Jokowi
inaugurate the opening of the first trading day in stock market in 2015, at the
Stock Exchange Building, Jakarta. Although in the last few years, the opening
of the stock market at the beginning of a year is regularly attended by the
President of Republic Indonesia, but the presence of Jokowi was special because
we all knew that, related to the tragedy of Air Asia, he had to go from Papua -
Jakarta - Pangkalan Bun – Surabaya, and back to Jakarta again in a matter of
days, and that's not including fulfilling the state duties such as receiving
George Soros at the Palace, held a meeting with the ministers related to fuel
prices, and appointed several new military high officials. However, he still
had time to came to the Stock Exchange and also present on time (before the
market opened at 09.00 AM), while before that (in the same morning) he visited the
market of Tanah Abang first! To ‘blusukan’ as usual, and also to open the trading
activities at the market.

Frankly, as an investor who spent more time to
relax and almost did nothing in the last year, I am feel ashamed to Mr.
President who seems like never run out of his stamina in running all of his
duties as the leader of the nation. Whether the traders in traditional markets or
in the stock market, and also the victims of Banjarnegara landslides and Air
Asia accident, all received direct attention from the RI-1 without exception!
So, I hereby declare, God bless you Mr. President! We wish you long life and a
good health and keep giving inspiration for all Indonesian people, to continue
to work hard based on capacity of each of us, in order to make a better
Indonesia.

Anyway, now we are to the core of this article.
Throughout the year 2014, as you know, the Jakarta Composite Index (JCI)
increased significantly, ie 22.3%. Based on the statistics in the last trading
day in 2014, the two sectors of the main drivers of the increase in JCI are the
property and construction with 55.8% of rise, and financial services (banking,
insurance, and financing) of 35.4%. Significant increase in the property and
construction sectors, particularly construction, one of which was driven by
investor’ optimism that the new government under President Jokowi will focus on
infrastructure development, so the construction companies will receive some benefit.
And because the infrastructure development is said to be focused on the
maritime sector, then the stocks of shipping, ports, and fisheries exposed to
positive sentiment and rose. If everything goes well, Indonesia will become
'axis of maritime world' within the next few years. Further explanation about
the prospects for construction and marine sectors can be read here,
and here.

However, like I’ve said, just because President
Jokowi was ready to build the marine infrastructure as soon as possible, then
it does not mean that we will instantly have ports, shipyards etc. in a matter
of days, so that it will give a positive impact on the national economy as a
whole. The construction of ports etc., somehow will require a long time, not
including the need to confront the challenges and obstacles that will surely
arise by themselves.

And unfortunately, if we return to look at the
national economy at this time, then
Indonesian economy is actually in a not-too-good shape. On January 2, the
Central Statistics Agency (Badan Pusat Statistik/BPS) released the data of
import-export balance for the period of January – November 2014, and the data
shows a deficit (imports were greater
than exports) of US$ 2.1 billion. The continuous deficits since 2012 also
pressed the growth of the national economy to the level of 5.0% only in the
third quarter of 2014 (year on year), or the lowest level in the last five years. The inflation data also did
not seem good, which was 8.4% for the whole year of 2014, or far above the
target of Bank Indonesia (BI) of 4.5%. Thus, although there are some people who
claim that the weakening of Rupiah to the position of Rp12,474 per US Dollar
was due to the strengthening of the US Dollar itself, because not only the Rupiah,
but almost all other currencies also weakened, but we also have to see the fact
that Indonesia's economic fundamentals, as already mentioned above, are not too
good.

In my opinion, this condition is a consequence of the
weakening of commodity prices, especially coal,
crude palm oil (CPO), and rubber that have occurred since 2012 until
today (we've discussed it here),
because these commodities are the mainstay of Indonesian exports. The last
position of the coal price is around US$ 65 per ton, and the CPO RM2,284 per
ton, both are still very far below their peak prices of US$ 110 per ton for
coal, and RM3,900 per tonne of CPO (for rubber prices, it is difficult to find the
data, but it were certainly dropped too). And you know what? Even in conditions
where the earnings of coal mining and oil palm plantation companies in
Indonesia Stock Exchange fell steadily in the last 3 years, both coal and CPO
are still the main export products of Indonesia (excluding oil and gas) with
the export values that are almost exactly the same, ie US$ 19.4 billion respectively
for the period of January – November 2014. While the export of electrical
equipments and machineries, which occupies the third position as the largest
non-oil exports of Indonesia, worth only US$ 8.9 billion (the export of rubber,
with a value of US$ 6.6 billion, occupied the fourth position). For comparison,
during the year of 2011 where the commodity prices were high, Indonesia
exported coal, palm oil, and rubber worth US$ 27.4, 21.7, and 14.3 billion
respectively, which makes the three commodities as the mainstay of Indonesia's
non-oil exports.

The problem is, outside the oil and gas, coal,
palm oil, and rubber, Indonesian exports are still dominated by natural
resources, such as cocoa, copper, nickel ore, and tin, where the value of
export of those commodities is also heavily dependent on international price
fluctuations. At the current condition where commodity prices are all down
without exception, the fundamentals of our economy at this time is even worse than a year's ago. In August
2013 when JCI was in one of its lowest level, ie 3,900 to 4,000, the Rupiah is
still at the level of Rp10,700 - 11,000 per USD, the economic growth recorded
at 5.8%, and the inflation was 8.8% (although inflation was already high, but
bear in mind that the BI Rate in August 2013 was only 6.50% and not 7.75% as it
is now). Although Warren Buffett often ignoring the macroeconomic data and
focus more on the fundamentals of the company, but this matter is still
bothering me as an investor, because it means that there is a fairly wide gap
between the current position of JCI with the economic facts on the ground. To
be honest, you have to admit that the increases in stock prices of
construction, shipbuilding to fisheries throughout 2014, on average, were more
driven by 'future prospects' than their real fundamental, were not it?

The condition that Indonesian economy is dependent
on fluctuations in commodity prices in the international market, reminds me
with the similar story of Qatar. If
you read about the macro economy (in Wikipedia or others), you would know that
Qatar is the most prosperous country in the world, with a GDP per capita of US$
146 thousand in 2013, or higher than any other country, and that’s because they
have one of the largest reserves of natural
gas in the world, where oil and natural gas sector accounts for more than 60%
of GDP in Qatar. Because the population in Qatar is about 2 million only, their
GDP per capita became very large. This condition is also similar to the state
of Brunei Darussalam, which is also
one of the countries with the highest GDP per capita in the world, because they
had abundand stocks of oil and natural gas for exports, while on the other side
the population is less than a half million only.

However, both the Government of Qatar and Brunei have
been aware since the beginning that they can not completely rely on oil and gas
exports, or their economic growth will easily be tossed around by the
fluctuation of the price of oil and gas itself in the international market.
That's why, since 1983, the Government of Brunei established the Brunei Investment Agency (BIA), which
is an agency under the Ministry of Finance of Brunei which specifically tasked
to reinvest the surplus funds
generated from oil and gas exports, so that funds are not wasted but turned into
assets that generate additional revenue for the state and also the Brunei
economy as a whole. BIA put the investment in a variety of assets, such as
Dolchester Collection, Beverly Hills Hotel, Grand Hyatt Singapore Hotel,
Paterson Securities (in Australia), Bahagia Investment Corp. (in Malaysia), and
so on.

While in Qatar, the local government established
the Qatar Investment Authority (QIA)
in 2005, with the aim that is also equal to BIA: To reinvest the surplus funds
generated from oil and gas exports. Although QIA is still a relatively new
company compared to BIA, but QIA is more aggressive in investing in which they
buy shares, either a minority or a majority, of the most prominent companies in
the world, such as Barclays, Fisker, the Volkswagen Group, Harrods Group,
Sainsbury's, Miramax Films, Credit Suisse, Royal Dutch Shell, to the Paris
Saint Germain football club. QIA recently also invested US$ 5 billion to build
a petrochemical facility in Malaysia, and placed US$ 10 billion for investment
in various sectors in China (in cooperation with CITIC Group as the fund
manager).

Then what about Indonesia?

Although Indonesia has vast and abundant reserves
of natural resources ranging from oil and gas, gold, nickel, coal, crude palm
oil, and rubber, but most of the natural resources controlled by the private
sector, both foreign and domestic, and not the Government, and this is
different with the Government of Brunei and Qatar that have full control over
almost all of their oil and gas reserves. As a result when commodity prices are
rising, the benefit only received by certain parties such as coal companies
instead of the people as a whole. That's why even though our economy is growing
significantly in recent years, but it was very
uneven, where some rich people in urban areas become richer, but the poor
people in the villages remain poor.

The problem is, if these corporations prefer to
withdraw the funds out from their surplus of coal exports etc (as did Banpu
through ITMG), then the country would received nothing. But when commodity
prices turned down, our economy remains affected. The Indonesian government is
not without control to the country’s natural resources, because they still
controlling the oil and gas through Pertamina
and SKK Migas, coal through Bukit Asam (PTBA),
and oil palm and rubber plantations through PT Perkebunan Nusantara (PTPN). But
well, how significant the authority of Pertamina over the oil reserves in
Indonesia? And SKK Migas, what are they doing? Including PTBA, try me, can they
take over the Kaltim Prima Coal (KPC) from the hand of Bumi
Resources (BUMI)?

However, the not-so-good performance that shown by
state-owned enterprises in the field of natural resources above, maybe it's
because of lack of support from the Government as well, where the House of
Representatives only asking the payment of dividend each year, or ask the
commissioner seat to receive the US$ 100,000 annual salary whereas his work
only to come once a year for a general shareholder meeting. At the end, both
the governments of Qatar and Brunei, they can have complete control over its
natural resources, because of the firmness of the Emir and the Sultan in
saying, 'all of these natural resources are belong to our people, and not certain
individuals or corporations!'. In managing its oil and gas, the Brunei Government
is actually not alone but in collaboration with Shell, and the Government of
Qatar also must cooperate with ExxonMobil, Total, Mitsui and Marubeni. However,
as the host, the Government of Brunei and Qatar are both in position of majority
shareholder of the oil company that was established, so that they have control
over such global oil companies, and not the otherwise.

Then how about the Indonesian government?

Under the leadership of President Jokowi, if you
watch his firmness in leading the military, police, and all elements of
Government that involved in the process of search and evacuation of Air Asia
QZ8501 until eventually some dead bodies could be evacuated in a relatively
short time, as well as how the Government could so easily pull out fuel
subsidies and execute other state decisions without the need for asking any
approval from the corrupt Parliament, then there is a great hope that Indonesia
is now have an effective government,
which could firmly tell certain individuals and corporations, both foreign and
domestic, that, 'the earth, water, and natural resources contained therein are controlled
by the state, and greatly used for the prosperity of the people!'. I hope that,
although of course it requires hard work and a long time, but one day the Government
of Indonesia will have enough control over natural resources reserves in our
own country, whether it be through state-owned enterprises or agencies that are
specifically set up to manage the natural resources.

Then, after making sure that the results of our
natural resources did not transported anywhere but returned to the land of
Indonesia, the Government will set up a special body, possibly with the name of
Indonesia's Investment Authorities
or the like, which is tasked to invest the surplus of natural resources (or of
anything), to productive assets. In
this way, although of course, would require a long time, then one day
Indonesia's economic growth will no longer depend on the fluctuations in
commodity prices, because we also have an alternative income in the form of
dividends or profit sharing of investments that have been previously placed,
where the income goes directly to the state treasury and can be allocated to
the state budget.

Conclusions

However, if the Government experiencing
difficulties in taking over the assets of natural resources scattered
throughout the archipelago (because, of
course, it is not THAT easy), then they at least can make some formulas or
rules that allow the Government to obtain more shares of the natural resources
produced by the companies. For example, beyond the taxes paid by the company,
the Government has received royalties from coal, export duty from CPO, as well
as royalties from the gold mine owned by Freeport and Newmont. If the Government
is able to negotiate with the corporations, then the value of the royalty and
export duty could be raised at a certain percentage, say by adjusting with the
price of commodities in the international market (so if coal prices rise, the
royalties go up, and also the otherwise).

The funds raised are then placed into a single
pool, say with the name of Indonesia
Natural Resources Fund, to then be used
for nothing but investment, in this case the investment in the country to
build the port infrastructure, power plants etc. Moreover, beyond the funds
managed by the state, the Government can issue regulations which requiring
corporations to use their large profit (from natural resources) to be invested
here rather than taken away out of the country.

Because, as we all know, the economic growth is
driven by four components: consumption,
investment, government spending, and exports,
and pressed by a single component: imports.
So to boost the economic growth, beyond encouraging the exports and reduce the
imports, the investment can also encouraged to. Both the Government and private
sector may invest in the country or also invest abroad, as long as the funds
are belonged to the government or local companies (thus, the profit resulted
from the investment will still return to Indonesia). When commodity prices are
rising, the Indonesian exports will also increase by itslef, but our point is
that the surplus of funds that could
be used for later investment, both by the government and private sectors, is
increasing too. And when the commodity prices are falling, the decline in the
value of exports will be compensated by an increase in investment, using the
‘saving’ from the periods when commodity prices were high.

In this way, by saving the excess funds when we
are in the period of harvesting, and use it later when the difficult period
came (for consumption, and government expenditure in the form of subsidies,
etc.), then the Indonesian economy will grow stably without the need to rely on
fluctuations in commodity prices in the international market.

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Dear Mr. President,

As ordinary people, we certainly do not have any
power to realize the above ideas. And frankly we feel ashamed because through this
writings, it seems that we just tried to give you and your Government an order
to do this and that, while I know that you’ve been very busy. We also know
exactly that what has been said above is much easier to be said than to be actually
done.

However, as said above, your hard work during this
time has inspired us to also do the same, to contribute in a positive way, even
if only in very small and insignificant form of contributions, to the
development of the country.

And in our capacity as writers and investors, we
can only provide these writings. There is no intent and purpose of this
writings unless we wanted Indonesia to become a developed country, where one
day when we travel abroad and asked by the locals about where we came from, we
can proudly say, 'from beloved Indonesia '.

Frankly, before you became the President, we were
not too optimistic with the Government, and that's why we were apathetic to
care only for ourselves but never care about the country. But your actions so
far has made such high optimism for all of us, that make us feel so excited to
also take part in the construction of the beloved archipelago. So with this we
say, you're not alone, Mr. President! Coz’ we are all behind you.